More on Local Debt

Local government debt remains at the forefront of many state leaders’ minds.  As reported previously in the Legislative Update, the Senate Intergovernmental Relations Committee has two, major local government debt charges to consider this interim.  In addition, the House Committees on Urban Affairs and Ways and Means have related charges.

The story about debt coming out of certain Austin think tanks these days goes something like this:  the state has its fiscal house in order, but local governments are greedy, profligate spenders running up the taxpayers’ credit card.  It’s a powerful narrative.  But it isn’t true.

A December 2013 report issued by the Texas Bond Review Board contains two handy charts that show total outstanding state and local debt for the past few years.  For the three-year period, 2009-2012, total local debt increased from $174.5 billion to $195.8 billion, a 12.2% increase.  For the same period, total state debt increased from $34.1 billion to $41 billion, a 20.3% increase.  In other words, local debt is increasing at a significantly slower rate than state debt in recent years.  (See chart below.)

Outstanding Debt Growth

There’s no doubt that the amount of total local debt is significant, at $195.8 billion.  However, only a small portion of that—$27 billion—is tax-supported city debt.  Another $36 billion is city debt supported by the revenues of city utilities and not by property taxes.  The largest part is, of course, tax-supported school district debt, at  $63 billion. 

School funding is a constitutional obligation of state government.  The state has chosen to discharge that obligation by creating local school districts that levy the needed taxes.  In reality, that $63 billion ought to be thought of as a state debt because that’s how the state has chosen to fund schools.  Shift that $63 billion over to the state debt column and a vastly different picture emerges about which governments may be falling dangerously into debt.  In any event, the numbers show it clearly isn’t Texas cities.

During the 2013 legislative session, legislation to prohibit the use of capital appreciate bonds (CABs) was introduced.  CABs are a form of bond in which the repayment may not begin for many years.  That deferment can result in extremely high future payoff amounts.  They are used frequently by school districts to finance infrastructure.  The Texas legislation was in response to a report by the Texas Bond Review Board showing that $2.3 billion in CABs were issued by local governments in Texas from 2007-2011. 

Only $12.6 million of those $2.3 billion in CABs were issued by cities, however, a mere 0.55 percent of the total.  The majority (65 percent) were issued by school districts.  A significant percentage (33 percent) were issued by special districts.  Again, cities aren’t the problem.  (See chart below.)

CABs Issued Value

The League would suggest that the recent focus on local debt (despite the fact that state debt is growing faster) likely relates to the reality that Texas state government, for better or worse, has gotten out of the business of building new state infrastructure with state dollars.  Instead, locals are expected to pick up the slack for things like roads and water projects.

Consider the recent water funding proposition that passed last November—it ultimately spends zero state dollars.  Instead, through the use of a revolving fund, it encourages cities to take on debt to build our state’s important reservoirs and other water projects.  This is a perfect example of the state essentially forcing locals to take on debt to do the state’s work, and then blaming locals for having taken on the debt in the first place.

Texas cities are willing to partner with state government to build infrastructure in our great state.  They would prefer, though, not to be scapegoats within that new partnership.  The League will continue to provide input to state leaders on the debt-related interim committee charges mentioned above.

 

TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League.

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